Blockchain has become one of the most talked about innovative technologies of the year. With the potential to streamline administrative processes, boost execution times and – according to a report by Santander – save global banks up to $20bn a year, it’s a wonder that asset managers haven’t jumped at the chance to adopt the technology.
Surprisingly, most of them haven’t. In fact, Roubini ThoughtLab’s survey of 500 asset managers around the world found fewer than half had implemented the technology so far. This is despite the fact that blockchain technology could be saving asset managers time and money on manual reporting processes, which, according to JP Morgan, could help cut their costs by around 25%.
Why aren’t asset managers interested?
For a start, many are mystified by the term. They aren’t familiar with how blockchain works, or what the benefits could be for their company.
For those of us who remain under the mystified category, here’s a breakdown:
- An individual blockchain refers to the shared record of all transactions and related information for an entity. This shared record or database is visible to all parties with appropriate permissions.
- A blockchain comprises an ever-increasing set of transaction blocks. Each block is a set of transactions between two or more parties (e.g. person A pays person B in exchange for an asset). This chain represents a complete history of transactions.
This can be helpful in simplifying procedures that go with collecting information on clients. Right now, potential clients must provide proof of identification, residency, marital status, sources of wealth, occupation, business interests and political ties – which can take weeks to collect.
With blockchain technology, individual profiles of customers can be built and stored on the system, with an audit trail for tracking any changes. Those who are allowed access to the profile will be able to track details about each customer, which saves hours of time for AMs – who would usually have to comb through and manually check each profile for updates.
Does it really work?
Usually Investors buy funds from their asset manager through the Internet individually, in a process that involves several lines of communication with distributors, transfer agents and clearing houses. Natixis, a Luxembourg-based asset manager, tried out a blockchain-powered fund management tool that allowed them to disrupt the traditional method, and execute several orders at the same time. Based on one estimate, cost savings for Luxembourg-domiciled funds could be somewhere in the ballpark of 1 billion euros annually.
Sounds great, right?
In theory, yes, but for smaller companies the new technology could spell bad news.
This is because the technology requires a huge amount of operational support and dedicated resources to put in place.
To process hundreds of orders in relatively short periods of time, the technology also needs to be scalable. For large asset managers, blockchain is relatively easy to put in place, and with a comparatively small initial cost impact, the technology can produce great rewards.
According to a report by JP Morgan, there will most likely be a “long transitional period, where legacy infrastructure and distributed ledger-based models coexist before full-scale implementation.
However, by plugging into the ecosystem early, grappling with the challenges of integrating the technology and understanding its strengths and gaps, cutting-edge asset managers can benefit.”
In other words, those companies who have the manpower and the money to put blockchain technology in place stand to succeed, and those who don’t, risk bankruptcy.
“The widespread introduction of blockchain could very well drive many ill-prepared asset managers out of business” according to the Wealth and Asset Management 2021 report by Roubini ThoughtLab.
“Technology is a tsunami that will radically change the face of financial services,” Professor Roubini told the Financial Times. “The losers will be those companies that are not nimble enough to adopt the new technology — and a lot of them may disappear.”
Unprepared Wealth Managers will lose out
According to a recent PwC study, 57% of asset managers weren’t sure how to respond to the potential of blockchain technology.
Many believe this is because the asset management field is often behind when it comes to fin-tech advances. Held back by time consuming compliance processes, digitally, asset managers often appear a few years behind every other industry.
But with the introduction of MIFIDII in January 2018, fund managers will be forced to update their systems, with a demand for complete transparency about charging, performance and asset allocation. Blockchain technology will allow an easier implementation of processes.
So when will the change come?
Overall, two-thirds of the Asset management companies said they expected to be using blockchain within five years.
And since the World Economic Forum predicts that within 10 years, the value of assets held on a blockchain-enabled distributed ledger will be equivalent of 10 per cent of global GDP – those of us without a plan need to catch up.
Author Sean Williams